The Hindu Business Line : Time for India to draw FDI into R&D

It is time our political leaders take our FDI policies seriously and set up a policy structure to attract the right quality and quantity of FDI that will enhance our technological prowess and our competitiveness. Rather than debate endlessly whether FDI should be allowed in real estate or retailing, it is much more important to attract FDI into research and development. This alone will enhance India's competitive strength.

THE World Investment Report (WIR) 2005 has focussed on a very topical issue — Foreign Direct Investment. This is appropriate as the WIR is concerned with trends of investment in the global economy. It has highlighted the global trends in FDI over the years and, in particular, its spread to the critical area of research and development in developing countries.

While the trends in FDI are on expected lines, China continues to be a favoured destination. While the global trend in FDI between 2003 and 2004 has been only marginally upwards, the trend of global FDI to developing countries has shown a big increase — to $233 billion, or a rise of 40 per cent.

The share of developing countries as a whole in global FDI was 36 per cent, the highest since 1997. The report shows that the United States retained its premier position as the number one recipient of FDI, followed by the United Kingdom and China.

The reasons for the dominance of developing nations in the global FDI race are obviously economic. The foreign investor is trying to get his manufacturing centre closer to the markets in developing countries.

There is also the added and important attraction of reduced costs and high skill levels, especially in countries such as China and India in certain sectors. Access to more natural resources in the face of high commodity prices is another factor. This has directly induced FDI in many countries in West Asia and Africa.

The transnational corporations, which are an outcome of FDI, are an unavoidable feature of a globalising economy and are very much a part of the global reality. The stock of FDI in 2004 is estimated at a mind-boggling $9 trillion. It is attributed to some 70,000 transnational corporations and their 690,000 affiliates around the world.

Their total sales, including those by foreign affiliates, amount to nearly $19 trillion. Among the top 100 TNCs worldwide, four companies led by Hutchison Whampoa (Hong Kong) are based in developing countries. Soon, mainland China and India may have a number of their own representatives in the list.

It is obvious from the figures that foreign direct investment continues to dominate global capital flows. They are actually far higher than the total official development aid (ODA). Of course, they are geographically concentrated in some developing economies. As a result, ODA remains critical for certain countries in Africa, untouched by the bounty of foreign direct investment.

China continues to be a leading destination for FDI. FDI inflows into China were $60 billion in 2004, rising from $52 billion in 2002. Against this, India had only an inflow of $5.3 billion in 2004 as against $3.4 billion in 2002. The island-state of Singapore had a FDI inflow of $16 billion in 2004.

India has a long way to go, if it is to tap the global pool of FDI resources for its economic growth. But, of course, leaders of different political parties have divergent views on this subject, none of which seems to focus on its criticality.

Adverting to certain doubts expressed regarding the FDI statistics, the WIR 2005 concedes that there are data problems in calculating FDI into different countries. At the outset, the report points out that the total of global FDI inflows and outflows themselves do not converge, which show that the figures have inherent flaws.

In particular, the WIR devotes a special "box" to explain the inconsistencies in China's estimates of FDI. It points out in a telling tabular statement that the accounts of investing countries that have invested into China and the data given out by China do not coincide.

The glaring differences in these estimates are mentioned without comment by the WIR, but one wonders what credence one can place on such data. (An attempt at reconciliation should not be beyond the powers of central bankers and Governments.) The figures of FDI for China as reported as emanating from the US are particularly glaring in their divergence (see Table).

Such sharp divergence may be due to non-inclusion of reinvested earnings or intra-company borrowings. But one searches in vain in the report for an attempt at an explanation for the sources of such problems. The global FDI discrepancy is yet another puzzle.

The WIR 2005 is particularly significant for its emphasis on the increasing trend of FDI into research and development in developing countries. This may soon catch up with outsourcing of other service industries that have boomed.

The report points out that outsourcing of R&D to developing countries reflects the increasing availability of competitive R&D manpower in those countries. It also reflects the pressure for cost reduction by transnational companies.

The WIR 2005 gives interesting data on the comparative position of different countries in the world R&D race. It points out that in terms of total R&D expenditure, only China and South Korea alone figure in the top 10 nations of the world. India is nowhere, may be due to tight-fisted financial policies.

The Report has an interesting table in relation to what WIR defines as the "Innovation Capability Index". The Index is defined as the average of the two separate indices — technological activity index and human capital index. The first is determined by a measure of R&D personnel per million population and US patents granted per million population as well as scientific publications.

The second is determined by literacy rate measured as percentage of population, secondary school involvement as percentage of age group and tertiary enrolment. The indices have been worked out for various countries. The statement shows that while China figures in the medium group of countries with an index of 0.354, India comes distinctly lower with a score of 0.285.

True, the population is the deflator and militates against countries with large populations. This factor acts equally adversely for China. The index, however flawed its design may be, indicates how receptive the country is to modern technological work in respect of advanced R&D in technologically relevant areas.

Indeed, achieving all this calls for substantial innovative steps on the part of the developing countries themselves. The overview clearly says, "The emphasis on policy coherence is one of the striking lessons learned from those developing countries that are now emerging as important modes in the knowledge frameworks of TNCs. In most of those countries, the starting point is the long-term vision of how to move the economy towards higher value added and knowledge-based activities".

The overview goes on to stress that the success of some Asian economies is no coincidence. It is rather the outcome of coherent and targeted government policies aimed at strengthening the overall framework for innovation and knowledge inflows. In some form — and to varying degrees — they have actively sought to attract technology know-how, people and capital from abroad.

They have invested strategically in human resources, typically with focus on science and engineering, invested in infrastructure development for R&D, such as science parks and public R&D laboratories, used performance requirements and incentives as part of the strategy to attract FDI in targeted activities and strategically implemented "Intellectual Property Right policies".

The above gives a comprehensive mix of ideas that should govern India's FDI policy! It is obvious that India has a lot to do to catch up with its neighbours to the north and east China and South Korea and also with its South East Asian would-be collaborators, Singapore and Malaysia.

It is time that our political leaders take our FDI policies seriously, and set up a policy structure to attract the right quality and quantity of FDI, which will enhance our technological prowess and our competitiveness. It is definitely time to call a halt to meaningless debates whether we should allow FDI in real estate or retailing. It is much more essential to focus on FDI in research and development. This is what matters. That alone will enhance India's competitive strength.

The latest World Investment Report of the Unctad has done well to focus our minds on the need to channel FDI into relevant areas, much as they may irk the protectionist lobbies in richer economies. Our aim should be to access as much as FDI in R&D as we can safely absorb. This will definitely benefit the economy as a whole, its innovative ability and competitive strength. If this calls for a restructuring of our overall development policies, including reorganising our education system, so be it.

There is no gain without pain. And FDI in R&D is the golden grail for which we have to go the extra mile. Planners of India take note!

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